5 Smart Dividend Stocks to Buy

Although the market has been driven higher by growth stocks in recent years, history suggests that dividends are a key driver of long-term stock returns.

In addition to providing a steady flow of income, dividends can bolster total returns and even provide investors with some protection against market downturns.

Smart dividend stocks to buy that have the potential to generate decades of reliable income include Johnson & Johnson, PepsiCo, Kraft Heinz, Brookfield Infrastructure Partners, and Procter & Gamble. 

Johnson & Johnson

With a 63-year history of dividend increases, healthcare and pharmaceutical titan Johnson & Johnson (NYSE:JNJ) has been a remarkably strong income asset for many decades. Today, the stock yields 3.0%.

To illustrate the power of Johnson & Johnson’s dividend growth machine, consider that 20 years ago the stock was paying just $0.63 annually per share. Today, that number has risen nearly eight times to $4.96.

Johnson & Johnson’s most appealing factor as a dividend stock may well be its low payout ratio. While many high-yield blue-chip stocks pay a majority of their earnings back to shareholders, Johnson & Johnson’s payout ratio is just over 30%. As such, the company’s dividend is extremely safe and likely will continue rising admirably for the foreseeable future.

Another benefit of JNJ is the fact that the company appears to be on a slow but steady growth trajectory. Earnings per share are expected to keep growing at about 4% per year over the next five years, creating the potential for gradually higher share prices.

Combined with its rock-solid dividend, this ongoing growth should make JNJ a good holding for conservative investors seeking a blend of income and growth with relatively low risk.

PepsiCo

Beverage giant Pepsico (NASDAQ:PEP) has been fairly aggressive in raising its dividends over the last several years for such a mature company. Over the last 10 years, the company’s dividend has increased at a compounded annual rate of 7.9%.

Management has also been steadily buying back shares for well over a decade, allowing it to return extra cash to shareholders through multiple channels. If these trends continue, it’s likely that shareholders will continue to see good overall returns from their Pepsi shares.

Beyond growth potential, Pepsi also offers an attractive level yield, which currently sits at 3.2%, an amount that is notably higher than rival Coca-Cola’s 2.7%.

At 78.7%, the dividend payout ratio is a bit on the high side. Pepsi’s 53-year history of raising its dividends suggests that the company won’t run into trouble increasing payouts anytime soon.

PepsiCo also appears to have a decent amount of growth left in it. Over the coming 5 years, analysts expect the company’s earnings per share to continue compounding at a rate of about 6.6% annually. This growth could set the stage for continued appreciation of share prices and a reasonably high rate of ongoing dividend growth.

A final point for Pepsi is the fact that it has an entrenched position in the soft drink market. While Coca-Cola is still the largest player, PepsiCo comes in second with a little over 24% market share.

This share has held more or less steady over several years, suggesting that Pepsi has enough of a moat around its business to make it a fairly safe investment.

Kraft Heinz

Food producer Kraft Heinz (NASDAQ:KHC) is an interesting addition to this list because it has a very high yield but may be a much less attractive dividend growth investment.

Shares of KHC currently yield 4.6%, well above the likes of Johnson & Johnson or PepsiCo. However, the company’s dividend has been stuck at $1.60 annually since 2019. As such, investors can be confident of fairly high income from their KHC shares but can’t be sure when or even if the stock’s dividend will begin to grow again.

This trade-off may make Kraft Heinz better for investors who are looking for immediate income than those hoping for long-term dividend increases. The benefits of the stock’s high yield, however, shouldn’t be ignored.

At the moment, the S&P 500 is yielding just under 1.3%. In other words, every dollar invested in Kraft Heinz today produces about 3.5 times the income it would if invested in the S&P.

The lack of dividend growth also doesn’t preclude investors from benefiting from rising share prices. During the past five years, the period during which the company’s dividend has remained stagnant, KHC shares have appreciated by a total of about 54%.

This trend of modest but steady appreciation may continue into the coming year, as the median target price for the stock of $38 would give it an upside of 9.6% against its current price of $34.68.

Brookfield Infrastructure Partners

Commanding the highest yield on this list is Brookfield Infrastructure Partners (NYSE:BIP), a midstream natural gas pipeline and utilities operator. BIP offers a dividend yield of 4.8%, almost four times that of the S&P 500.

Though it can’t claim the kind of decades-long growth history that Pepsi or Johnson & Johnson can, Brookfield has successfully raised its dividend for the last 17 years.

Brookfield is also growing at a respectable pace that could allow shareholders to benefit from future dividend expansion.

In its Q2 report, for example, the company reported a 10% growth in funds from operation, or FFO, bringing the total to $608 million.

Impressively, this total growth occurred in spite of a fairly steep decline in FFO from utilities. Transport more than made up for that shortfall, rising by about 60% year-over-year.

In addition to its pipeline and utility businesses, Brookfield is also investing heavily in the growing data center business. In Q2, this segment accounted for $78 million of the company’s FFO.

In the upcoming two years, Brookfield plans to substantially expand its data center capacity. This could create the opportunity for Brookfield to profit from the ongoing surge in AI demand, as companies are increasingly needing more data storage to train and support large language AI models.

Procter & Gamble

A final smart dividend stock at the moment is consumer goods giant Procter & Gamble (NYSE:PG). With a yield of 2.3%, PG provides a bit less income than the other stocks on this list.

With a 69-year history of dividend growth, however, Procter & Gamble has undeniably been one of the best long-term dividend growth stocks in the American market. Even after all this time, PG’s payout ratio is still about 65%, leaving room for the company to further expand its dividend over time.

Another factor that makes Procter & Gamble attractive despite its somewhat lower yield is the fact that the business is all but recession-proof.

In both the 2008 financial crisis and the COVID-19 pandemic crash, PG shares performed better than the overall market.

Because Procter & Gamble produces a wide range of consumer essentials under well-known and trusted brands, the company’s sales and earnings tend to remain relatively steady even when the broader economy is in turmoil.

Looking forward, Procter & Gamble’s earnings are expected to continue growing at about 6% per year. As with other blue-chip stocks, this gives PG a good chance to produce a combination of growth in share prices as well as dividends.

Higher share prices are also likely to be supported by the company’s ongoing share buybacks. In its last fiscal year, Procter & Gamble repurchased $5 billion worth of its own shares. Combined with $9.3 billion in dividends, this represented a total of over $14 billion in cash that was returned to shareholders.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.